CASE STUDY: Macerich Makes Riches

Two years ago, when retail REITs experienced a huge wave of consolidation, firms caught in the middle faced a choice: Eat or be eaten. Today, the decision is far more appetizing.

For one thing, more capital is being invested in development and redevelopment than in acquisitions. For Macerich Co., two bold mergers in less than 30 months enabled the company to bulk up during the consolidation wave, leaving it in a position to grow through development today.

The Top 10 REITs expanded their portfolios by about 250 million square feet between 2003 and 2005. During that time, Macerich nearly doubled its size from 42 million square feet at the end of 2003 to 78.9 million square feet at the end of 2005.

In the process, its $1.5 billion acquisition of Phoenix-based Westcor and $2.3 billion buyout of Rochester, N.Y.-based Wilmorite have transformed the company. Historically a value-added REIT with a concentration in the West that had grown through acquiring and redeveloping malls, Macerich is now a true national player. More important, it has vastly expanded its development capabilities, meaning future growth for the company will come both through acquisition and ground-up development.

Barry Vinocur, editor of Realty Stock Review, notes that some analysts questioned the price Macerich paid for Westcor. Then the same people commented that “Wilmorite will never be a Westcor. The truth of the matter,” says Vinocur, “is that the guys at Macerich have grown the company methodically. Ed Coppola (senior executive vice president and chief investment officer) maximizes returns for stockholders.”

Joseph French, senior investment advisor for Sperry Van Ness admits the pricing was rich, but thinks it is working out for the firm.

“The 6 percent cap rate paid is pretty aggressive for an entire portfolio,” French says. But “Macerich bought Wilmorite right.” French says the Wilmorite portfolio is projected to generate 6.75 percent in returns. “Good regional malls are doing in the 4s and 5s, so in the 6s is a really good, strong mall.”

French adds that since these are higher-end properties, investors would be willing to live with less return anyway.

Tale of two mergers

Though both the Wilmorite and Westcor deals were of similar size, Macerich employed a different strategy in integrating the two firms. Wilmorite properties were absorbed under the Macerich brand, while Westcor operates as a separate, wholly owned division of the company.

David Contis, Macerich COO/executive vice president says the decision on whether to retain or change the names of the merged firms was based on the strength of the existing brands. Westcor has strong name recognition in the Arizona market that Macerich felt was important to retain. Wilmorite, on the other hand, had less recognition because its assets were spread out along the East Coast.

Still, with both companies, Macerich has stressed retaining the identities of the merged firms within the larger umbrella company. Like Westcor, which kept its name, corporate culture and headquarters in Phoenix, Wilmorite remains based out of Rochester with elements of its original culture intact.

In both mergers, most employees, including top executives, were retained, “because we look at people as resources, rather than on the expense side of the equation,” Contis says, noting that employees absorbed in the deal are not only experienced professionals, they are also familiar with the acquired properties, property tenants and the communities where they are located.

“It is far easier to buy an organization and tell employers they have a new culture and that's how it's going to be,” he continues, “but we felt that if done properly, it [integrating the different cultures] would be beneficial to the whole organization.” He suggests that changeover required a leap of faith by those absorbed, so this approach also helped to soften the impact and bolster employee morale.

Former Wilmorite CEO John Anderson left and formed his own company, Northern Capital Group, which serves as a consultant to Macerich and manages four properties acquired in Rochester. But much of the rest of Wilmorite leadership has been retained. Thomas Wilmot Jr. remains president of Wilmorite's board of directors. The company has an option to buy back four Rochester-area properties in 2007, and meanwhile is biding its time and looking for opportunities in New England and the Mid-Atlantic, according to Dennis Wilmot, vice president and regional director of leasing.

The Wilmorite deal included 11 regional malls, but was primarily about Wilmorite's top three performing properties, Tyson's Corner in northern Virginia, the Danbury Mall in Connecticut and Freehold Raceway Mall in New Jersey.

Integrating distinctly different cultures under one corporate umbrella did, however, present challenges. For example, Westcor and Wilmorite had different salary structures for its executives, as well as different operational styles, right down to simple things like how to answer the phone. Noting that Westcor answers the phone, “We make good things happen,” Contis says: “You can't believe how invested people become in that stuff.”

Though Macerich allows Westcor and Wilmorite operational autonomy, the company established support networks to provide expertise to regional management teams. For example, he says that unlike most regional shopping center owners, which take a geographical approach to leasing, Macerich employs a hybrid approach, providing a corporate cadre of leasing experts to assist local teams in sealing deals.

Contis says, however, that getting the different teams on the same page took a little creativity. He notes, for example, that he was having trouble getting Westcor and Macerich people to collaborate. “I got the 10 top Westcor and Macerich executives together and threw a box of business cards on the table with their names and the opposite company's name on them. It was a good way to show them what I meant when I say Westcor represents Macerich in Westcor markets and vice versa,” he explains.

The synergy created by the Macerich-Westcor merger strengthened both companies, with Westcor providing Macerich with new development expertise and a strong position in the Phoenix market, and Macerich helping Westcor with redevelopment and strategic tenanting and leasing. Macerich's experience with tenanting in Hispanic markets in California, for instance, helped Westcor position the Desert Sky Mall to meet the retail needs of the property's predominantly Hispanic clientele. On the other hand, “Macerich got into new development because of Westcor,” Contis says.

David Scholl, senior vice president of development for Westcor, says that since 2004 the company has been project-focused, with the two entities working together on projects and planning.

Collaboration of the Macerich-Westcor teams recently resulted in completion of Phoenix 20/20, the blueprint for a long-term initiative aimed at creating market-driven, strategically timed retail projects throughout the region. (See story on page 174.)

Macerich's financial strength provided Westcor with capital for acquisition of competing assets, as well as new development. Westcor was able to secure two prize properties that serve the affluent Scottsdale market, for example: The Biltmore Fashion Park, a 608,976-square-foot mall, located in north Phoenix on the border with Scottsdale, and Kierland Commons, a 450,000-square-foot center that has become Scottsdale's Main Street development. It features more than 70 upscale specialty retailers along with contemporary, urban residences.

While Kierland Commons is already a model for lifestyle centers and does not require improvements, the Macerich-Westcor alliance plans to renovate and retenant Biltmore to fit Macerich's Lumenati luxury retail concept and add an open-air lifestyle component.

Macerich rolled out Lumenati in 2004, a sub-brand that promises to deliver an ultimate level of service to coveted, top-tier retail tenants at the company's collection of nine luxury properties. (See related story on luxe shopping on page 104.) “This is a tenant-driven concept and then property-driven — they tell us where they want to be, and we'll create it,” says Contis. “It involves understanding the needs of our retailers and identifying a group of properties in which the common thread is they [upscale tenants] all want to be in those properties.”

Macerich mixed-use

Macerich purchased property adjacent to Biltmore Fashion Park and plans to develop a high-density, mixed-use project there, consisting of two luxury condominium towers and a hotel. This project is among a number of mixed-use and redevelopment projects Macerich will undertake along with its Westcor and Wilmorite teams.

Beside the Westcor projects in Arizona and Colorado, Macerich plans to create a live-work-play village with the addition of a mix of uses at Tyson's Corner, a 2.4-million-square-foot mall in McLean, Va., that Macerich picked up from Wilmorite.

The company recently completed a 350,000-square-foot expansion at Tyson's Corner, adding 30 upscale retailers, restaurants, a two-story Barnes & Noble and a 16-screen AMC theater. Plans call for an additional 3 million square feet, which will include an outdoor lifestyle retail component, luxury condominiums, a hotel and office space to the mix.

While the Macerich-Westcor team is really good at retail development, Contis admits, that currently there is no in-house experience in developing all the various components comprising mixed-use development. “If we do the residential ourselves, we would have to add people with that expertise,” he says.

As for future growth, Contis says, “We don't need to be the biggest, but we want to be the best.”

GOING NATIONAL

PROBLEM:

During a time of heavy consolidation within the retail REIT industry, Macerich Co. was stuck in the middle. It had a large West Coast presence, but was not quite a national player. Rumors hinted at a possible sell-off.

SOLUTION:

Two mergers in less than three years nearly doubled Macerich's size, gave it a national presence and brought in house a wealth of development expertise. Today, the company can pursue future growth through acquisition or development in many more markets.

BUZZ:

Macerich subsidiary Westcor is playing a major role in Phoenix's rapid expansion. The city is projected to double in size by 2020. Westcor has a hand in master-planned developments all around the city.

DATA:

Macerich Co.'s portfolio stood at 78.9 million square feet at the end of 2005, nearly double the 42 million square feet it controlled at the end of 2003.

Phoenix 20/20

Led by Westcor and planned in collaboration with community stakeholders, Phoenix 20/20 will leverage retail projects to generate additional economic development and investment in communities. With the region's population expected to double during the next 20 years, reaching 7 million to 8 million people, David Scholl, senior vice president of Westcor, says the firm plans to build five new projects, some of which will include residences, office space and hotels.

The first project, SanTan Village is at the heart of the 500-acre SanTan Village master-planned community in affluent Gilbert just south of Phoenix, a city cited by the 2000 census as the fastest growing in the nation. Retail components include a 1.2 million-square-foot open-air lifestyle center scheduled to open in the fall of 2007.

Estella Falls, a mixed-use development at the core of a 300-acre master-planned community in the Southwest Valley community of Goodyear, will encompass retail, multi-family residences and office space. Other projects:

Prasada, an outdoor regional shopping center in a master-planned community in Surprise, Ariz., north of Scottsdale, will open in 2010.

Palisene, a Lumenati-brand regional shopping center in northeast Phoenix on the city's border with Scottsdale, will open in 2009 or 2010.

The Black Canyon project (yet to be officially named), is a regional shopping center on the far north side of the city of Phoenix, slated to open sometime after 2010. — PK